Personal Bankrupty Can Take Two Forms

Bankruptcy is the final result in abuse of credit. When an individual no longer can maintain financial control, the court can enforce a plan.

There are two kinds of bankruptcy for individuals - Chapter 7 and Chapter 13 - says Elaine D. Scott, Virginia Tech Extension specialist in family finance.

Chapter 7 involves liquidating all the persons' assets and uses the funds to pay all the debts as far as possible. The court makes the decision of how much of the money each creditor gets. The people in debt can keep their clothing and some furniture, but all other assets are sold.

If the assets include a house that is free and clear of any mortgage, the debtors have a right to a homestead exclusion in the house.

After this type of bankruptcy, individuals are free of any debt even if the liquidation of assets did not provide enough money to pay the debts.

Another type of bankruptcy is Chapter 13, which is known as the wage-earner plan. In a Chapter 13 bankruptcy, the consumers file a plan as to how the debt will be paid. Usually they will pay the entire debt in three to five years.

One reason for using Chapter 13 is that it provides protection from creditors in that all interest charges on the debt are stopped for the three to five years that the plan usually covers. If a person has filed either type of bankruptcy, it is a part of the credit record for seven years.